cost management - accounting and control 6th ed (intro txt) - d. hansen, et al., (cengage, 2009)

Examples of the topics cov-ered in this section include activity-based customer and supplier costing, strategic cost management, activity-based budgeting, activity-based management, proc

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1 2 3 4 5 6 7 11 10 09 08 07

Lindell and Leola Wise

John L Myers and Marjorie H Myers

Jingtai and Wen Guan

v

Over the past twenty years, changes in the business environment have profoundly

affected cost accounting and cost management A few examples of these changes

are an increased emphasis on providing value to customers, total quality

manage-ment, time as a competitive elemanage-ment, advances in information and manufacturing

tech-nology, globalization of markets, service industry growth, deregulation, and heightened

awareness of ethical and environmental business practices These changes are driven by

the need to create and sustain a competitive advantage For many firms, the information

required to realize a competitive advantage can no longer be derived from a traditional

cost management system The traditional system relies on functional-based costing and

control In a functional-based system, costing and control are centered on organizational

functions Unfortunately, this functional-based approach often fails to provide

informa-tion that is detailed, accurate, and timely enough to support the requirements of this new

environment This has resulted in the emergence of an activity-based cost management

system Typically, an activity-based cost management system is more detailed and more

accurate than a functional-based cost management system and, thus, more costly to

operate Furthermore, the need to add a formal guidance mechanism to the new

activity-based system has created a demand for strategic-activity-based cost management Thus, the new

cost management system might be more accurately referred to as an activity- and

strategic-based cost management system The adoption of activity- and strategic-strategic-based cost

man-agement in many firms therefore suggests that in many cases the benefits of this more

sophisticated system outweigh its costs On the other hand, the continued existence and

reliance on functional-based systems suggests the opposite for other firms

The coexistence of functional-based systems with activity- and strategic-based cost

management systems necessitates the study of both systems, thus providing flexibility and

depth of understanding In creating a text on cost management, we had to decide how to

design its structure We believe that a systems approach provides a convenient and logical

framework Using a systems framework allows us to easily integrate the functional- and

activity-based approaches in a way that students can easily grasp Integration is achieved by

developing a common terminology—a terminology that allows us to define each system and

discuss how they differ Then the functional and activity-based approaches can be compared

and contrasted as they are applied to costing, control, and decision making We believe this

integration will allow students to appreciate the differences that exist between functional-

and activity-based approaches This integration is especially useful in the decision-making

chapters, as it allows students to see how decisions change as the information set changes

For example, how does a make-or-buy decision change as we move from a functional-based,

traditional cost management system to the richer, activity-based cost management system?

Compared to the 5th edition, this text has been streamlined by combining and

eliminating some materials Notably, the coverage of environmental costs in Chapter 16

is reduced and combined with Chapter 14 A new Chapter 16, on lean accounting, is

instituted for this edition The end-of-chapter exercises are also streamlined

This text is written primarily for students at the undergraduate level The text presents

a thorough treatment of traditional and contemporary approaches to cost management, accounting, and control and can be used for a one- or two-semester course In our opinion, the text also has suffi cient depth for graduate level courses In fact, we have successfully used the text at the graduate level

KEY FEATURES

We feel that the text offers a number of distinctive and appealing features—features that should make it much easier to teach students about the emerging themes in today’s business world One of our objectives was to reduce the time and resources expended by instructors

so that students can be more readily exposed to today’s topics and practices To help you understand the text’s innovative approach, we have provided a detailed description of its key features

STRUCTURE

The text’s organization follows a systems framework and is divided into four parts:

1 Part 1: Foundation Concepts Chapters 1 through 4 introduce the basic concepts and tools associated with cost management systems

2 Part 2: Fundamental Costing and Control Chapters 5 through 10 provide ough coverage of product costing, planning, and control in both functional-based and activity-based costing systems

3 Part 3: Advanced Costing and Control Chapters 11 through 16 present the key elements of the new cost management approaches Examples of the topics cov-ered in this section include activity-based customer and supplier costing, strategic cost management, activity-based budgeting, activity-based management, process value analysis, target costing, kaizen costing, quality costing, environmental cost management, productivity, the Balanced Scorecard, and lean manufacturing and accounting

4 Part 4: Decision Making Chapters 17 through 21 bring the costing and control tools together in the discussion of decision making

This edition’s structure permits integrated coverage of both the traditional and based costing systems In this way, students can see how each system can be used for costing, control, and decision making and can evaluate the advantages and disadvantages

activity-of each system This approach helps students to see how cost management is applied to problems in today’s world and to understand the richness of the approaches to business problems

CONTEMPORARY TOPICS

The emerging themes of cost management are covered in depth We have provided a framework for comprehensively treating both functional-based and activity-based topics A common terminology links the two approaches; however, the functional- and activity-based approaches differ enough to warrant separate and comprehensive treatments The nature and extent of the coverage of contemporary topics is described below As this summary reveals, there is suffi cient coverage of activity- and strategic-based topics to provide a course that strongly emphasizes these themes

Historical Perspective

Chapter 1 provides a brief history of cost accounting The historical perspective allows

students to see why functional-based cost management systems work well in some settings

but no longer work for other settings The forces that are changing cost management

practices are described The changing role of the management accountant is also covered

with particular emphasis on why the development of a cross-functional expertise is so

critical in today’s environment

Accounting and Cost Management Systems

In Chapter 1, the accounting information system and its different subsystems are defi ned

Distinctions are made between the fi nancial accounting and the cost management systems

and the differing purposes they serve The cost management system is broken down into

the cost accounting system and the operational control system The differences between

functional-based and activity-based cost management systems are defi ned and illustrated

The criteria for choosing an activity-based system over a functional-based system are also

discussed

Cost Assignment Methods

In Chapter 2, three methods of cost assignment are delineated: direct tracing, driver

tracing, and allocation Activity drivers are also defi ned Once the general cost assignment

model is established, the model is used to help students understand the differences between

functional-based and activity-based cost management systems A clear understanding of

how the two systems differ is fundamental to the organizational structure that the text

follows

Value Chain Analysis

The provision of value to customers is illustrated by the internal value chain, which is fi rst

introduced in Chapter 1 and defi ned and illustrated more completely in Chapter 2 Chapter

11 provides a detailed discussion of value chain analysis and introduces the industrial value

chain Value chain analysis means that managers must understand and exploit internal and

external linkages so that a sustainable competitive advantage can be achieved Exploitation

of these linkages requires a detailed understanding of the costs associated with both

internal and external factors This edition expands the treatment of value chain analysis

by introducing, defi ning, and illustrating activity-based supplier costing and activity-based

customer costing The costing examples developed show how the value chain concepts can

be operationalized—a characteristic not clearly described by other treatments Thus, we

believe that the operational examples are a signifi cant feature of the text

Activity Costs Change as Activity Usage Changes

Chapter 3 is a comprehensive treatment of cost behavior First, we defi ne variable, fi xed, and

mixed activity cost behavior Then, we discuss the activity resource usage model and detail

the impact of fl exible and committed resources on cost Finally, we describe the methods

of breaking out fi xed and variable activity costs The chapter on cost behavior analysis

is more general than usual chapters that treat the subject Traditional treatment usually

focuses on cost as a function of production volume We break away from this pattern and

focus on cost as a function of changes in activity usage with changes in production activity

as a special case The activity resource usage model is used to defi ne activity cost behavior

(in terms of when resources are acquired) and is defi ned and discussed in Chapter 3 This

resource usage model plays an important role in numerous contemporary applications It

is used in value chain analysis (Chapter 11), activity- based management (Chapter 12), and tactical decision and relevant costing analysis (Chapter 18) The extensive applications of the activity resource usage model represent a unique feature of the text.

Activity-Based Costing

Much has been written on the uses and applications of ABC This text presents a comprehensive approach to activity-based costing and management The activity-based product costing model is introduced in Chapter 2 and described in detail in Chapter 4 In this chapter, the advantages of ABC over functional-based costing are related A complete discussion of how to design an ABC system is given This includes identifying activities, creating an activity dictionary, assigning costs to activities, classifying activities as primary and secondary, and assigning costs to products To fully understand how an ABC system works, students must understand the data needed to support the system Thus, we show how the general ledger system must be unbundled to provide activity information Methods on simplifying a complex ABC system are discussed In addition to discussion of approximately relevant ABC systems, we have added new material on the time-driven ABC systems

Activity-Based Budgeting

Activity-based budgeting is now combined with traditional budgeting concepts in ter 8 This integrated treatment helps students to see how budgets can be extended with the power of activity-based cost concepts This chapter introduces the basics of activity-based budgeting and gives an expanded example in a service setting Flexible budgeting and the behavioral impact of budgets are also included in this chapter

Chap-Just-in-Time Effects

JIT manufacturing and purchasing are defi ned and their own cost management practices discussed in Chapters 11 and 21 JIT is compared and contrasted with traditional man-ufacturing practices The effects on areas such as cost traceability, inventory management, product costing, and responsibility accounting are carefully delineated

Life Cycle Cost Management

In Chapter 11, we defi ne and contrast three different life cycle viewpoints: production life cycle, marketing life cycle, and consumable life cycle We then show how these concepts can be used for strategic planning and analysis In later chapters, we show how life cycle concepts are useful for pricing and profi tability analysis (Chapter 19) The breadth, depth, and numerous examples illustrating life cycle cost applications allow students to see the power and scope of this methodology

Strategic Cost Management

A detailed introduction to strategic cost management is provided in Chapter 11 Understanding strategic cost analysis is a vital part of the new manufacturing environment Strategic cost management is defi ned and illustrated Strategic positioning is discussed Structural and executional cost drivers are introduced Value chain analysis is described with the focus on activity-based supplier and customer costing The role of target costing

in strategic cost management is also emphasized

Activity-Based Management and the Balanced Scorecard

There are three types of responsibility accounting systems: functional-based, activity-based, and strategic-based These three systems are compared and contrasted, and the activity-

and strategic-based responsibility accounting systems are discussed in detail

Activity-based responsibility accounting focuses on controlling and managing processes The

mechanism for doing this process value analysis is defi ned and thoroughly discussed in

Chapter 12 Numerous examples are given to facilitate understanding Value-added and

non-value-added cost reports are described Activity-based responsibility accounting also

covers activity measures of performance, which are thoroughly covered in Chapter 13

The Balanced Scorecard is equivalent to what we are calling strategic-based responsibility

accounting The basic concepts and methods of the Balanced Scorecard are presented in

Chapter 13

Costs of Quality: Measurement and Control

Often, textual treatments simply defi ne quality costs and present cost of quality reports

We go beyond this simple presentation (in Chapter 14) and discuss cost of quality

performance reporting We also describe quality activities in terms of their

value-added content In addition, we introduce and describe ISO 9000, an important quality

assurance and reporting system that many fi rms must now follow Finally, Chapter 14

emphasizes the growing strategic importance of environmental cost management This

chapter introduces and discusses the concept of ecoeffi ciency It also defi nes, classifi es, and

illustrates the reporting of environmental costs and how to assign those costs to products

and processes

Productivity: Measurement and Control

The new manufacturing environment demands innovative approaches to performance

measurement Productivity is one of these approaches; yet it is either only superfi cially

discussed in most cost and management accounting texts or not treated at all In Chapter

15, we offer a thorough treatment of the topic, including some new material on how to

measure activity and process productivity

Lean Accounting

This text adds a new subject on lean manufacturing and lean accounting in Chapter 16

Many companies are changing their business processes to focus on the customer as well

as on the value chain activities that support a customer orientation and focus on the

elimination of waste These companies have embarked on lean manufacturing that aims at

shedding waste The change in manufacturing process leads to the change in accounting

This change in accounting, referred to as lean accounting, organizes costs according to

the value chain and collects both fi nancial and nonfi nancial information The objective is

to provide fi nancial statements that better refl ect overall performance, using both fi nancial

and nonfi nancial information

Theory of Constraints

We introduce the theory of constraints (TOC) in Chapter 21 A linear programming

framework is used to facilitate the description of TOC and provide a setting where students

can see the value of linear programming In fact, our treatment of linear programming is

motivated by the need to develop the underlying concepts so that TOC can be presented

and discussed This edition expands the coverage of TOC by adding a discussion of

constraint accounting

Service Sector Focus

The signifi cance of the service sector is recognized in this text through the extensive

application of cost management principles to services The text explains that services

are not simply less complicated manufacturing settings but instead have their own

characteristics These characteristics require modifi cation of cost management accounting principles Sections addressing services appear in a number of chapters, including product costing, pricing, and quality and productivity measurement.

Professional Ethics

Strong professional ethics need to be part of every accountant’s personal foundation We are convinced that students are interested in ethical dimensions of business and can be taught areas in which ethical confl icts occur Chapter 1 introduces the role of ethics and reprints the ethical standards developed by the Institute of Management Accountants To reinforce coverage of ethics, most chapters have an ethics case for discussion In addition, many chapters include sections on ethics For example, Chapter 19, on pricing and revenue analysis, includes material on the ethical dimensions of pricing

Real World Examples

Our years of experience in teaching cost and management accounting have convinced us that students like and understand real world applications of accounting concepts These real world examples make the abstract accounting ideas concrete and provide meaning and color Besides, they’re interesting and fun Therefore, real world examples are integrated throughout every chapter Use of color for company names that appear in the chapters and the company index at the end of the text will help you locate these examples

Outstanding Pedagogy

We think of this text as a tool that can help students learn cost accounting and cost management concepts Of paramount importance is text readability We have tried to write a very readable text and to provide numerous examples, real world applications, and illustrations of important cost accounting and cost management concepts Specifi c

“student-friendly” features of the pedagogy include the following:

• Whenever possible, graphical exhibits are provided to illustrate concepts In our rience, some students need to “see” the concept; thus, we have attempted to portray key concepts to enhance understanding Of course, many numerical examples are also provided

expe-• All chapters (except Chapter 1) include at least one review problem and solution These problems demonstrate the computational aspects of chapter materials and rein-force the students’ understanding of chapter concepts before they undertake end-of-chapter materials

• A glossary of key terms is included at the end of the text Key terms lists at the end of each chapter identify text pages for fuller explanation

• All chapters include comprehensive end-of-chapter materials These are divided into

“Questions for Writing and Discussion,” “Exercises,” and “Problems.” The Questions

for Writing and Discussion emphasize communication skill development Exercises

and Problems to support every learning objective are included, and the relevant topics

and learning objectives are noted in the text margins The exercises and problems are

graduated in difficulty from easy to challenging CMA problems are included to give

the student access to relevant problem material found on the examination

• This edition continues to offer cooperative learning exercises in the end-of-chapter

materials in each chapter These exercises encourage students to work in groups to

solve cost management problems

• Spreadsheet template problems are identified in the end-of-chapter materials with

an appropriate icon These problems are designed to help students use spreadsheet

applications to solve cost accounting problems

COMPREHENSIVE SUPPLEMENTS PACKAGE

Check Figures. Check figures for solutions to selected problems in certain chapters

are provided on the Instructor’s Resource CD-Rom as an aid to students as they prepare

their answers Instructors may copy and distribute these as they see fit

Instructor’s Manual. The instructor’s manual contains a complete set of lecture

notes for each chapter, a listing of all exercises and problems with estimated difficulty and

time required for solution, and a list of relevant chapter exhibits

Solutions Manual. The solutions manual contains the solutions for all

end-of-chapter questions, exercises, and problems Solutions have been verified several times to

ensure their accuracy and reliability

Test Bank.The test bank offers multiple-choice problems, short problems, and essay

problems Designed to make exam preparation as convenient as possible for the

instruc-tor, each test bank chapter contains enough questions and problems to permit the

prepa-ration of several exams without repetition of material Available electronically only on the

Instructor’s Resource CD-Rom

ExamView Testing Software. This program is an easy-to-use test creation

soft-ware compatible with Microsoft Windows Instructors can add or edit questions,

instruc-tions, and answers, and select questions (randomly or numerically) by previewing them

on the screen Instructors can also create and administer quizzes online, whether over the

Internet, a local area network (LAN), or a wide area network (WAN) Available only on

the Instructor’s Resource CD-Rom

Spreadsheet Templates. Spreadsheet templates using Microsoft Excel® provide

outlined formats of solutions for selected end-of-chapter exercises and problems These

exercises and problems are identified with a margin symbol The templates allow students

to develop spreadsheet and “what-if” analysis skills The student templates can be

down-loaded from the text website The solutions are available on the Instructor’s Resource

CD-Rom or via download from the website

PowerPoint Slides. Selected transparencies of key concepts and exhibits from the

text are available in PowerPoint presentation software These slides provide a

comprehen-sive outline of each chapter Available for download on the text website (instructors only)

or on the Instructor’s Resource CD-Rom

Instructor’s Resource CD-ROM, 0-324-65730-7 Key instructor

ancil-laries (solutions manual, instructor’s manual, test bank, and PowerPoint slides) are

pro-vided on CD-Rom, giving instructors the ultimate tool for customizing lectures and

presentations

Website (http://www.academic.cengage.com/accounting/hansen)

A website designed specifically for Cost Management, sixth edition, provides online and

downloadable resources for both instructors and students The website features learning objectives, web links, glossaries, and online quizzes

The Business & Company Resource Center An easy way to give students access to a dynamic database of business information and resources is offered by way of the Business & Company Resource Center (BCRC) The BCRC provides online access

to a wide variety of global business information including current articles and business journals, detailed company and industry information, investment reports, stock quotes, and much more The BCRC saves valuable time and provides students a safe resource in which to hone their research skills and develop their analytical abilities Other benefits of the BCRC include:

• Convenient access from anywhere with an Internet connection, allowing students to access information at school, at home, or on the go

• A powerful and time-saving research tool for students—whether they are completing a case analysis, preparing for a presentation, creating a business plan, or writing a reac-tion paper

• Serving as an online coursepack, allowing instructors to assign readings and based assignments or projects without the inconvenience of library reserves, permis-sions, and printed materials

research-• Acts as a filter, eliminating the “junk” information often found when searching the Internet, providing only high- quality, safe, and reliable news and information sources

• Infomarks that make it easy to assign homework, share articles, create journal lists, and save searches Instructors can combine the BCRC with their favorite Harvard Business School Publishing cases to provide students a case analysis research tool at no additional cost Contact your local South-western/Cengage Learning representative

to learn how to include Business & Company Resource Center with your text

Harvard Business Case Studies The leader in business education publishing ners with the leader in business cases to offer Harvard Business Case Studies As part of South-western/Cengage Learning’s commitment to giving customers the greatest choice

part-of teaching and learning solutions possible, we are proud to be an part-official distributor part-of Harvard Business School Publishing case collections and article reprints The combination

of preeminent cases and articles from Harvard Business School Publishing with the alleled scope and depth of customizable content from South-western/Cengage Learning provides instructors and students with a wide array of learning materials You can draw from multiple resources and disciplines to match the unique needs of your course This bundling offers the following conveniences:

unpar-• For Instructors: Instructors can work with one source instead of multiple vendors, allowing the local Cengage Learning representative to manage the prompt delivery of teaching resources and students materials

• For Students: Pricing for cases is very affordable—and when packaged with the book, students receive a significant discount on the text and coursepak

text-• Ordering: Once you have identified the cases and articles you want to use, simply use an order form provided by your Cengage Learning representative to indicate your selections and packaging preferences Once you return your form, you will be contacted within 48 hours by a Cengage Learning customer representative to confirm your order and walk you through the rest of the process

Combine Harvard Business School cases and articles with the BCRC and take your coursepak to the next level Contact your sales representative for details

Many people have provided valuable feedback to help improve the text We appreciate the

comments from the following reviewers:

Michael Flores, Wichita State University

Rafi k Elias, California State University – Los Angeles

Sanjay Gupta, Valdosta State University

Frank Stangota, Rutgers University

Nat Briscoe, Northwestern State University

Terry Dancer, Arkansas State University

Martha Lair Sale, Sam Houston State University

Cheryl Copeland, California State University – Fresno

Bruce Bradford, Fairfi eld University

Cecil M Battiste III, Valencia Community College

Chiaho Chang, Montclair State University

Marvin L Bouillon, Iowa State University

Darlene Coarts, University of Northern Iowa

Special thanks to Jim Emig for his careful verifi cation of the solutions manual and test bank

Additional thanks goes to the students of Oklahoma State University and the University

of Hawaii Students represent our true constituency and greatly refl ect the enhancements

we make to each edition of this text

Finally, we want to express our gratitude to the Institute of Management Accountants

for its permission to use adapted problems from past CMA examinations and to reprint

the ethical standards of conduct for management accountants

Don R Hansen, Maryanne M Mowen, Liming Guan

Don R Hansen

Dr Don R Hansen is Head of the School of Accounting at Oklahoma State University

He received his Ph.D from the University of Arizona in 1977 He has an undergraduate

degree in mathematics from Brigham Young University His research interests include

activity-based costing and mathematical modeling He has published articles in both

ac-counting and engineering journals including The Acac-counting Review, The Journal of

Man-agement Accounting Research, Accounting Horizons, and IIE Transactions He has served

on the editorial board of The Accounting Review His outside interests include family,

church activities, reading, movies, watching sports, and studying Spanish

Maryanne M Mowen

Dr Maryanne M Mowen is Associate Professor of Accounting at Oklahoma State

University She received her Ph.D from Arizona State University in 1979 Dr

Mow-en brings an interdisciplinary perspective to teaching and writing in cost and

manage-ment accounting, with degrees in history and economics In addition, she does research

in areas of behavioral decision making, activity-based costing, and the impact of the

Sarbanes-Oxley Act She has published articles in journals such as Decision Science,

The Journal of Economics and Psychology, and The Journal of Management Accounting

Research Dr Mowen’s interests outside the classroom include reading mysteries,

travel-ing, and working crossword puzzles

Liming Guan

Dr Liming Guan is Associate Professor of Accounting at the University of Hawaii at

Manoa He received his Ph.D in accounting from Oklahoma State University in 2001 Dr

Guan has a bachelor’s degree in management science and a master’s degree in agricultural

economics His research interests are in the areas of earnings management and accounting

systems design He has published more than twenty articles in journals such as Advances

in Accounting, Journal of International Accounting Research, Journal of International

Financial Management and Accounting, Journal of Forensic Accounting, ACM DataBase,

and International Journal of Accounting Information Systems Outside the classroom, Dr

Guan likes swimming, hiking, reading, and watching the History Channel

xv

CHAPTER 4 Activity-Based Costing 85

Fundamental Costing and Control 128

CHAPTER 5 Product and Service Costing: Job-Order System 130 CHAPTER 6 Product and Service Costing: A Process Systems

Approach 167 CHAPTER 7 Allocating Costs of Support Departments and Joint

Products 209 CHAPTER 8 Budgeting for Planning and Control 249 CHAPTER 9 Standard Costing: A Functional-Based Control Approach 297 CHAPTER 10 Decentralization: Responsibility Accounting, Performance

Evaluation, and Transfer Pricing 336

Advanced Costing and Control 374

CHAPTER 11 Strategic Cost Management 376 CHAPTER 12 Activity-Based Management 429 CHAPTER 13 The Balanced Scorecard: Strategic-Based Control 467 CHAPTER 14 Quality and Environmental Cost Management 497 CHAPTER 15 Productivity Measurement and Control 533

CHAPTER 16 Lean Accounting 562

Decision Making 588

CHAPTER 17 Cost-Volume-Profi t Analysis 590 CHAPTER 18 Activity Resource Usage Model and Tactical Decision

Making 632 CHAPTER 19 Pricing and Profi tability Analysis 669 CHAPTER 20 Capital Investment 714

CHAPTER 21 Inventory Management: Economic Order Quantity, JIT,

and the Theory of Constraints 760 Glossary 797

Subject Index 809 Company Index 831

Part 1 Foundation Concepts 1

CHAPTER 1 Introduction to Cost Management 3

A Systems Framework 3

Accounting Information System 4

Factors Affecting Cost Management 6

Global Competition 7Growth of the Service Industry 7Advances in Information Technology 7Advances in the Manufacturing Environment 8Customer Orientation 9

New Product Development 9Total Quality Management 10Time as a Competitive Element 10Effi ciency 10

The Role of the Management Accountant 10

Planning 10Controlling 11Continuous Improvement 11Decision Making 11

Accounting and Ethical Conduct 12

Benefi ts of Ethical Behavior 12Standards of Ethical Conduct for Management Accountants 12

Certification 14

Certifi cate in Management Accounting 14Certifi cate in Public Accounting 14Certifi cate in Internal Auditing 14

CHAPTER 2 Basic Cost Management Concepts 23

Cost Assignment: Direct Tracing, Driver Tracing, and Allocation 23

Cost Objects 24Accuracy of Assignments 24

Product Costs 26

Product Cost Defi nitions 27Product Costs and External Financial Reporting 27

External Financial Statements 30

Income Statement: Manufacturing Firm 30Income Statement: Service Organization 32

xix

Functional-Based and Activity-Based Cost Management Systems 33

Functional-Based Cost Management Systems: A Brief Overview 33Activity-Based Cost Management Systems: A Brief Overview 34Choice of a Cost Management System 36

CHAPTER 3 Cost Behavior 50

Basics of Cost Behavior 51

Fixed Costs 51Variable Costs 52Mixed Costs 53Time Horizon 54

Resources, Activities, and Cost Behavior 55

Flexible Resources 55Committed Resources 55Step-Cost Behavior 56

Methods for Separating Mixed Costs into Fixed and Variable Components 58

The High-Low Method 59Scatterplot Method 60The Method of Least Squares 61Using Regression Programs 63

Reliability of Cost Formulas 64

Hypothesis Testing of Parameters 65Goodness of Fit Measures 65Confi dence Intervals 65

Multiple Regression 66The Learning Curve and Nonlinear Cost Behavior 69

Cumulative Average-Time Learning Curve 69

Managerial Judgment 71

CHAPTER 4 Activity-Based Costing 85

Functional-Based Product Costing 86

Overhead Application: Plantwide Rate 87Disposition of Overhead Variances 88Overhead Application: Departmental Rates 89

Limitations of Plantwide and Departmental Rates 90

Non-Unit-Related Overhead Costs 90Product Diversity 91

An Example Illustrating the Failure of Unit-Based Overhead Rates 91ABC Users 96

Activity-Based Costing System 96

Activity Identifi cation, Defi nition, and Classifi cation 97Assigning Costs of Overhead Resources to Activities 99Assigning Secondary Activity Costs to Primary Activities 101Cost Objects and Bills of Activities 102

Activity Rates and Product Costing 103

Reducing the Size and Complexity of an ABC System 103

Approximately Relevant ABC Systems 104Time-Driven ABC Systems 106

Part 2: Fundamental Costing and Control 128

CHAPTER 5 Product and Service Costing: Job-Order System 130

Characteristics of the Production Process 130

Manufacturing Firms versus Service Firms 131Unique versus Standardized Products and Services 131

Setting Up the Cost Accounting System 132

Cost Accumulation 132Cost Measurement 133Cost Assignment 134Choosing the Activity Level 136

The Job-Order Costing System: General Description 137

Overview of the Job-Order Costing System 137Job Time Tickets 139

Overhead Application 140Unit Cost Calculation 140

Job-Order Costing: Specific Cost Flow Description 141

Accounting for Direct Labor Cost 142Accounting for Overhead 143Accounting for Finished Goods Inventory 144Accounting for Cost of Goods Sold 146Accounting for Nonmanufacturing Costs 148

Single versus Multiple Overhead Rates 148Appendix: Accounting for Spoilage in a Traditional Job-Order System 150

CHAPTER 6 Product and Service Costing: A Process Systems

Approach 167

Process-Costing Systems: Basic Operational and Cost Concepts 167

Cost Flows 168The Production Report 170Unit Costs 170

Process Costing with No Beginning or Ending Work-in-Process Inventories 172

Service Organizations 172JIT Manufacturing Firms 172The Role of Activity-Based Costing 173

Process Costing with Ending Work-in-Process Inventories 173

Equivalent Units as Output Measures 173Cost of Production Report Illustrated 174Nonuniform Application of Productive Inputs 174Beginning Work-in-Process Inventories 176

FIFO Costing Method 176

Step 1: Physical Flow Analysis 177Step 2: Calculation of Equivalent Units 178Step 3: Computation of Unit Cost 178Step 4: Valuation of Inventories 178Step 5: Cost Reconciliation 179Journal Entries 179

Weighted Average Costing Method 180

Step 1: Physical Flow Analysis 181Step 2: Calculation of Equivalent Units 181Step 3: Computation of Unit Cost 182Step 4: Valuation of Inventories 182Step 5: Cost Reconciliation 182Production Report 183FIFO Compared with Weighted Average 184

Treatment of Transferred-In Goods 184

Step 1: Physical Flow Analysis 185Step 2: Calculation of Equivalent Units 186Step 3: Computation of Unit Costs 186Step 4: Valuation of Inventories 186

Operation Costing 187

Basics of Operation Costing 188Operation Costing Example 189

Appendix: Spoiled Units 191

CHAPTER 7 Allocating Costs of Support Departments and Joint

Products 209

An Overview of Cost Allocation 209

Types of Departments 210

Allocating One Department’s Costs to Another Department 213

A Single Charging Rate 213Dual Charging Rates 214Budgeted versus Actual Usage 216Fixed versus Variable Bases: A Note of Caution 218

Choosing a Support Department Cost Allocation Method 219

Direct Method of Allocation 219Sequential Method of Allocation 220Reciprocal Method of Allocation 223Comparison of the Three Methods 225

Departmental Overhead Rates and Product Costing 225Accounting for Joint Production Processes 226

Cost Separability and the Need for Allocation 227Distinction and Similarity between Joint Products and By-Products 227

Accounting for Joint Product Costs 228Allocation Based on Relative Market Value 230

CHAPTER 8 Budgeting for Planning and Control 249

The Role of Budgeting in Planning and Control 250

Types of Budgets 250Gathering Information for Budgeting 252

Preparing the Operating Budget 253

Sales Budget 254Production Budget 255Direct Materials Purchases Budget 255Direct Labor Budget 256

Overhead Budget 257Ending Finished Goods Inventory Budget 257Cost of Goods Sold Budget 258

Marketing Expense Budget 258Research and Development Expense Budget 258Administrative Expense Budget 259

Budgeted Income Statement 259Operating Budgets for Merchandising and Service Firms 260

Preparing the Financial Budget 260

The Cash Budget 260Budgeted Balance Sheet 264Shortcomings of the Traditional Master Budget Process 265

Flexible Budgets for Planning and Control 267

Static Budgets versus Flexible Budgets 267

Activity-Based Budgets 272The Behavioral Dimension of Budgeting 275

Characteristics of a Good Budgetary System 276

Chapter 9 Standard Costing: A Functional-Based Control

Approach 297

Developing Unit Input Standards 298

Establishing Standards 298Usage of Standard Costing Systems 298

Standard Cost Sheets 299Variance Analysis and Accounting: Direct Materials and Direct Labor 301

Calculating Direct Materials Price and Usage Variances 301Accounting for Direct Materials Price and Usage Variances 304Calculating Direct Labor Variances 304

Accounting for the Direct Labor Rate and Effi ciency Variances 306Investigating Direct Materials and Labor Variances 306

Disposition of Direct Materials and Direct Labor Variances 307

Variance Analysis: Overhead Costs 308

Four-Variance Method: The Two Variable Overhead Variances 309Four-Variance Analysis: The Two Fixed Overhead Variances 311Accounting for Overhead Variances 315

Two- and Three-Variance Analyses 316

Mix and Yield Variances: Materials and Labor 317

Direct Materials Mix and Yield Variances 318Direct Labor Mix and Yield Variances 319

Chapter 10 Decentralization: Responsibility Accounting, Performance

Evaluation, and Transfer Pricing 336

Measuring the Performance of Investment Centers 339

Return on Investment 339Residual Income 342Economic Value Added 343Multiple Measures of Performance 346

Measuring and Rewarding the Performance of Managers 346

Measuring Performance in the Multinational Firm 346Managerial Rewards: Encouraging Goal Congruence 347

Transfer Pricing 349

The Impact of Transfer Pricing on Income 349

Setting Transfer Prices 350

Market Price 350Negotiated Transfer Prices 351Cost-Based Transfer Prices 354Transfer Pricing and the Multinational Firm 355

Part 3: Advanced Costing and Control 374

CHAPTER 11 Strategic Cost Management 376

Strategic Cost Management: Basic Concepts 377

Strategic Positioning: The Key to Creating and Sustaining a Competitive Advantage 377

Value-Chain Framework, Linkages, and Activities 379Organizational Activities and Cost Drivers 380Operational Activities and Drivers 381

Value-Chain Analysis 382

Exploiting Internal Linkages 382Exploiting Supplier Linkages 384Exploiting Customer Linkages 386

Life-Cycle Cost Management 389

Product Life-Cycle Viewpoints 389Interactive Viewpoint 391

Role of Target Costing 393

Just-in-Time (JIT) Manufacturing and Purchasing 395

Inventory Effects 396Plant Layout 397Employee Empowerment 398Total Quality Control 398

JIT and Its Effect on the Cost Management System 398

Traceability of Overhead Costs 399Product Costing 400

JIT’s Effect on Job-Order and Process-Costing Systems 400Backfl ush Costing 400

CHAPTER 12 Activity-Based Management 429

The Relationship between Activity-Based Costing and Activity-Based Management 430

Process Value Analysis 431

Driver Analysis: Defi ning Root Causes 431Activity Analysis: Identifying and Assessing Value Content 431Assessing Activity Performance 434

Financial Measures of Activity Efficiency 434

Reporting Value-Added and Non-Value-Added Costs 434Trend Reporting of Non-Value-Added Costs 436The Role of Kaizen Standards 437

Benchmarking 438Activity Flexible Budgeting 439Activity Capacity Management 441

Implementing Activity-Based Management 442

The ABM Implementation Model 442Why ABM Implementations Sometimes Fail 444

Financial-Based versus Activity-Based Responsibility Accounting 444

Assigning Responsibility 445Establishing Performance Measures 446Evaluating Performance 447

Assigning Rewards 447

CHAPTER 13 The Balanced Scorecard: Strategic-Based Control 467

Activity-Based versus Strategic-Based Responsibility Accounting 468

Assigning Responsibility 469Establishing Performance Measures 469Performance Measurement and Evaluation 470Assigning Rewards 471

Basic Concepts of the Balanced Scorecard 471

Strategy Translation 472Financial Perspective, Objectives, and Measures 472Customer Perspective, Objectives, and Measures 474Process Perspective, Objectives, and Measures 475Learning and Growth Perspective, Objectives, and Measures 478

Linking Measures to Strategy 480

The Concept of a Testable Strategy 480Strategic Feedback 481

Strategic Alignment 482

Communicating the Strategy 482Targets and Incentives 482Resource Allocation 484

CHAPTER 14 Quality and Environmental Cost Management 497

Costs of Quality 498

Defi ning Quality Costs 498Quality Cost Measurement 500Reporting Quality Costs 500The Role of Activity-Based Cost Management 501

Quality Cost Information and Decision Making 502

Decision-Making Contexts 502Certifying Quality through ISO 9000 505

Controlling Quality Costs 505

Choosing the Quality Standard 506Types of Quality Performance Reports 507

Defining, Measuring, and Controlling Environmental Costs 511

Environmental Costs Defi ned 512Environmental Cost Report 512Environmental Cost Reduction 513

An Environmental Financial Report 514

CHAPTER 15 Productivity Measurement and Control 533

Productive Efficiency 534Partial Productivity Measurement 534

Partial Productivity Measurement Defi ned 535Partial Measures and Measuring Changes in Productive Effi ciency 536Advantages of Partial Measures 537

Disadvantages of Partial Measures 537

Total Productivity Measurement 537

Profi le Productivity Measurement 537Profi t-Linked Productivity Measurement 539Price-Recovery Component 540

Measuring Changes in Activity and Process Efficiency 541

Activity Productivity Analysis 541Process Productivity Analysis 543Process Productivity Model 544

CHAPTER 16 Lean Accounting 562

Lean Manufacturing 563

Value by Product 564Value Stream 564Value Stream Mapping 566Value Flow 566

Pull Value 568Pursue Perfection 569

Appendix: Value Stream Costing with Multiple Products:

Features and Characteristics Costing 577

Part 4: Decision Making 588

CHAPTER 17 Cost-Volume-Profi t Analysis 590

The Break-Even Point in Units 591

Operating Income Approach 591

Contribution Margin Approach 592Profi t Targets 593

After-Tax Profi t Targets 594

Break-Even Point in Sales Dollars 595

Profi t Targets 598Comparison of the Two Approaches 598

Multiple-Product Analysis 598

Break-Even Point in Units 599Sales Mix and CVP Analysis 599Sales Dollars Approach 601

Graphical Representation of CVP Relationships 601

The Profi t-Volume Graph 601The Cost-Volume-Profi t Graph 603Assumptions of Cost-Volume-Profi t Analysis 604

Changes in the CVP Variables 604

Introducing Risk and Uncertainty 606Sensitivity Analysis and CVP 608

CVP Analysis and Activity-Based Costing 610

Example Comparing Conventional and ABC Analysis 610Strategic Implications: Conventional CVP Analysis versus ABC Analysis 611

CVP Analysis and JIT 612

CHAPTER 18 Activity Resource Usage Model and Tactical Decision

Making 632

Tactical Decision Making 633

The Tactical Decision-Making Process 633Qualitative Factors 635

Relevant Costs and Revenues 636

Relevant Costs Illustrated 636Irrelevant Cost Illustrated 636

Relevancy, Cost Behavior, and the Activity Resource Usage Model 637

Flexible Resources 637Committed Resources 637

Illustrative Examples of Tactical Decision Making 638

Make-or-Buy Decisions 639Keep-or-Drop Decisions 642Special-Order Decisions 646Decisions to Sell or Process Further 647

CHAPTER 19 Pricing and Profi tability Analysis 669

Market Structure and Price 670Pricing Policies 671

Cost-Based Pricing 671Target Costing and Pricing 672

Other Pricing Policies 673

The Legal System and Pricing 674

Predatory Pricing 674Price Discrimination 674Ethics 676

Analysis of Profit-Related Variances 687

Sales Price and Price Volume Variances 687Contribution Margin Variance 688Market Share and Market Size Variances 689

Limitations of Profit Measurement 690

CHAPTER 20 Capital Investment 714

Capital Investment Decisions 715Payback and Accounting Rate of Return: Nondiscounting Methods 716

Payback Period 716Accounting Rate of Return 718

The Net Present Value Method 719

The Meaning of NPV 719Weighted Average Cost of Capital 719

An Example Illustrating Weighted Average Cost of Capital 720

Internal Rate of Return 721

Example with Uniform Cash Flows 721IRR and Uneven Cash Flows 722

NPV versus IRR: Mutually Exclusive Projects 722

NPV Compared with IRR 722Example: Mutually Exclusive Projects 724

Computing After-Tax Cash Flows 726

Conversion of Gross Cash Flows to After-Tax Cash Flows 726

Capital Investment: Advanced Technology and Environmental Considerations 732

How Investment Differs 732How Estimates of Operating Cash Flows Differ 733

An Example: Investing in Advanced Technology 733Salvage Value 735

Discount Rates 735

Appendix A: Present Value Concepts 737

Future Value 737Present Value 738Present Value of an Uneven Series of Cash Flows 738Present Value of a Uniform Series of Cash Flows 738

Appendix B: Present Value Tables 740

CHAPTER 21 Inventory Management: Economic Order Quantity, JIT,

and the Theory of Constraints 760

Just-in-Case Inventory Management 761

Justifying Inventory 761Economic Order Quantity: A Model for Balancing Acquisition and Carrying Costs 762

When to Order or Produce 763Demand Uncertainty and Reordering 764

An Example Involving Setups 765EOQ and Inventory Management 765

JIT Inventory Management 766

A Pull System 766Setup and Carrying Costs: The JIT Approach 767Avoidance of Shutdown and Process Reliability: The JIT Approach 768Discounts and Price Increases: JIT Purchasing versus Holding

Inventories 771JIT’s Limitations 771

Basic Concepts of Constrained Optimization 772

One Binding Internal Constraint 773Internal Binding Constraint and External Binding Constraint 773Multiple Internal Binding Constraints 773

Theory of Constraints 776

Operational Measures 777Five-Step Method for Improving Performance 778

Glossary 797Subject Index 809Company Index 831

1 Introduction to Cost Management

2 Basic Cost Management Concepts

3 Cost Behavior

4 Activity-Based Costing

AFTER STUDYING THIS CHAPTER, YOU SHOULD BE ABLE TO:

1 Describe a cost management system, its

objec-tives, and its major subsystems

2 Identify the current factors affecting cost

A system is a set of interrelated parts that performs one or more processes to accomplish

specific objectives Consider a home air-conditioning system This system has a number

of interrelated parts such as the compressor, the fan, the thermostat, and the duct work

The most obvious process (or series of actions designed to accomplish an objective) is the

cooling of air; another is the delivery of cooled air to various rooms in the house The

primary objective of the system is to provide a comfortable, cool environment for people

in the house Notice that each part of the system is critical for achievement of the overall

objective For example, if the duct system were missing, the air conditioner would not be

able to cool the house even if the other parts were present and functional

But how does a system work? A system uses processes to transform inputs into

outputs that satisfy the system’s objectives Consider the cooling process This process

requires inputs such as warm air, Freon, and electricity The inputs are transformed into

© Photodisc Green/Getty Images

OBJECTIVE

1 Describe a cost management system, its objectives, and its major subsystems

3

cooled air, an output of the cooling process The output of the process, cooled air, is obviously critical to achieving the overall objective of the system The cooled air and additional electricity become inputs to the delivery process This process transforms the inputs so that a portion of the total cooled air is delivered to each room of the house (the output is delivered air) In this way, all rooms are cooled to the desired temperature, thereby achieving the system’s objective The operational model for the air-conditioning system is shown in Exhibit 1-1.

Cooling Process Delivery Process

Inputs:

Cooled Air Electricity Ducts

Output:

Delivered Cooled Air

Inputs:

Freon Warm Air Electricity

Output:

Cooled Air

EXHIBIT 1-1 Operational Model of the Air-Conditioning System

Accounting Information System

An accounting information system is one that consists of interrelated manual and puter parts and uses processes such as collecting, recording, summarizing, analyzing, and managing data to provide information to users Like any system, an accounting informa-tion system has objectives, interrelated processes, and outputs The overall objective of

com-an accounting information system is to provide information to users The interrelated processes include such things as collecting, recording, summarizing, and managing data Some processes may also be formal decision models—models that use inputs and provide recommended decisions as the information output The outputs are data and reports that provide needed information for users The operational model for an accounting informa-tion system is illustrated in Exhibit 1-2 Examples of the inputs, processes, and outputs are provided in the exhibit (The list is not intended to be exhaustive.)

The accounting information system can be divided into two major subsystems: (1) the

financial accounting system and (2) the cost management system We will emphasize the

sec-ond, although it should be noted that the two systems are not independent of each other Ideally, the two subsystems should be integrated and have linked databases Output of each

of the two systems can be used as input for the other system

Financial Accounting System

A financial accounting system is primarily concerned with producing information for

the company’s external information users It uses well-specified economic events as

inputs, and its processes follow certain rules and conventions For financial accounting, the nature of the inputs and the rules and conventions governing processes are defined by the Securities and Exchange Commission (SEC) and the Financial Accounting Standards Board (FASB) Among its outputs are financial statements such as the balance sheet, income statement, and statement of cash flows for external users (investors, creditors, government agencies, and other outside users) Financial accounting information is used

for investment decisions, stewardship evaluation, activity monitoring, and regulatory

measures

Cost Management System

A cost management system is primarily concerned with producing outputs for internal

information users, using inputs and processes needed to satisfy management objectives

A cost management information system is not bound by externally imposed criteria that

define inputs and processes Instead, the criteria that govern the inputs and processes are

set by people within the company The cost management system provides information

for three broad objectives:

1 Costing of products, services, and other objects of interest to management;

2 Planning and control; and

3 Decision making

The information requirements for satisfying the first objective depend on the nature of

the object being costed and the reason management wants to know the cost For

exam-ple, product costs calculated in accordance with generally accepted accounting principles

(GAAP) are needed to value inventories for the balance sheet and to calculate the cost of

goods sold in the income statement These product costs include the cost of materials,

labor, and overhead In other cases, managers may want to know all costs that are

associ-ated with a product for purposes of tactical and strategic profitability analysis If so, then

additional cost information may be needed concerning product design, development,

marketing, and distribution For example, pharmaceutical companies may want to

associ-ate research and development costs with individual drugs or drug families

Cost information is also used for planning and control It should help managers

decide what should be done, why it should be done, how it should be done, and how

well it is being done For example, information about the expected revenues and costs for

a new product could be used as an input for target costing At this stage, the expected

revenues and costs may cover the entire life of the new product Thus, projected costs of

design, development, testing, production, marketing, distribution, and servicing would

be essential information

Finally, cost information is a critical input for many managerial decisions For

exam-ple, a manager may need to decide whether to continue making a component internally

or to buy it from an external supplier In this case, the manager would need to know the

cost of materials, labor, and other productive resources associated with the manufacturing

of the component and which of these costs would vanish if the product were no longer

produced Also needed is information concerning the cost of purchasing the component,

including any increase in cost for internal activities such as receiving and storing goods

A cost management system consists of two major subsystems: the cost accounting

system and the operational control system The cost accounting system is a cost

manage-ment subsystem designed to assign costs to individual products and services and other cost

Operational Model of an Accounting Information System

Special ReportsFinancial StatementsBudgets

Performance Reports

objects as specified by management For external financial reporting, the cost accounting system must assign costs to products in order to value inventories and determine cost of goods sold Furthermore, these assignments must conform to the rules and conventions set by the SEC and the FASB These rules and conventions do not require that all costs assigned to individual products be causally related to the consumption of productive resources by individual products Thus, using financial accounting principles to define product costs may lead to under- and over-statements of individual product costs.

At the individual product level, distorted product costs can cause managers to make significant decision errors For example, a manager might erroneously deemphasize a product that is, in reality, highly profitable For decision making, accurate product costs are needed If possible, the cost accounting system should produce product costs that simultaneously are accurate and satisfy financial reporting conventions If not, then the cost system must produce two sets of product costs: one that satisfies financial reporting criteria and one that satisfies management decision making needs

The operational control system is a cost management subsystem designed to vide accurate and timely feedback concerning the performance of managers and others relative to their planning and control of activities Operational control is concerned with what activities should be performed and assessing how well they are performed It focuses

pro-on identifying opportunities for improvement and helping to find ways to improve A good operational control system provides information that helps managers engage in a program of continuous improvement of all aspects of their businesses

Exhibit 1-3 illustrates the various subsystems of the accounting information system that we have been discussing

Accounting Information System

Financial Accounting System

Cost Accounting System

Cost Management System

Operational Control System

EXHIBIT 1-3 The Subsystems of an Accounting Information System

FACTORS AFFECTING COST MANAGEMENT

Over the last few decades, worldwide competitive pressures, deregulation, growth in the service industry, and advances in information and manufacturing technology have changed the nature of the economy and caused many firms in manufacturing and service industries to dramatically change the way in which they operate These changes, in turn, have prompted the development of innovative and relevant cost management practices For example, activity-based accounting systems have been developed and implemented

in many organizations Additionally, the focus of cost management systems has been broadened to enable managers to better serve the needs of customers and manage the firm’s business processes that are used to create customer value A firm can establish a competitive advantage by providing more customer value for less cost than its competi-tors Accounting information must be produced to help build such superiority

OBJECTIVE

2

Identify the current factors

affecting cost management

Global Competition

Vastly improved transportation and communication systems have led to a global market

for many manufacturing and service firms Several decades ago, firms neither knew nor

cared what similar firms in Japan, France, Germany, and China were producing These

foreign firms were not competitors, because their markets were separated by

geographi-cal distance Now, both small and large firms are affected by the opportunities offered

by global competition Stillwater Designs, a small Oklahoma-based firm that designs

and markets Kicker speakers, has significant markets in Europe and outsources most

of its manufacturing to Asia At the other end of the size scale, Procter & Gamble,

The Coca-Cola Company, and Mars, Inc., are developing sizable markets in China

Automobiles currently being made in Japan can be in the United States in two weeks

Investment bankers and management consultants can communicate with foreign offices

instantly using video conferencing technology Improved transportation and

communica-tion in conjunccommunica-tion with higher quality products that carry lower prices have upped the

ante for all firms This new competitive environment has increased the demand not only

for more cost information but also for more accurate cost information Cost information

plays a vital role in reducing costs, improving productivity, and assessing product-line

profitability

Growth of the Service Industry

As manufacturing industries declined in importance, the service sector of the economy

has increased in importance The service sector now constitutes approximately

three-quarters of the U.S economy and employment Many services—among them accounting

services, transportation, and medical services—are exported For example, major U.S

CPA firms have practices in most developed and developing countries Experts predict

that this sector will continue to expand in size and importance as service productivity

grows Deregulation of many services (e.g., airlines and telecommunications in the past

and utilities in the present) has increased competition in the service industry Many service

organizations are scrambling to survive The increased competition has made managers in

this industry more conscious of the need to have accurate cost information for planning,

controlling, continuous improvement, and decision making Thus, the changes in the

service sector add to the demand for innovative and relevant cost management systems

Advances in Information Technology

Three significant advances relate to information technology One is intimately connected

with computer-integrated applications With automated manufacturing, computers are

used to monitor and control operations Because a computer is being used, a

consider-able amount of useful information can be collected, and managers can be informed about

what is happening within an organization almost as it happens It is now possible to track

products continuously as they move through the factory and to report (on a real-time

basis) such information as units produced, material used, scrap generated, and product

cost The outcome is an operational information system that fully integrates

manufactur-ing with marketmanufactur-ing and accountmanufactur-ing data

An enterprise resource planning (ERP) system is a centralized database system

that integrates all functional areas of a firm and provides access to real-time data from any

functional area of the firm Using this real-time data enables managers to continuously

improve the efficiency of organizational units and processes

Automation and integration increase both the quantity (detail) and the timeliness of

information For managers to fully exploit the value of the more complex information

system, they must have access to the data of the system—they must be able to extract and

analyze the data from the information system quickly and efficiently This, in turn, implies

that the tools for analysis must be powerful

The second major advance supplies the required tools: the availability of personal

computers (PCs), online analytic programs (OLAP), and decision support systems (DSS)

The PC serves as a communication link to the company’s information system, and OLAP